Industry Changes and Challenges

President-elect Barack Obama promised to reshape the nation's healthcare system to provide coverage for millions of uninsured Americans. His strategy is to expand federal and local government programs that provide care for individuals and children and to require employers to "play or pay" to support insurance for workers. During the campaign, Obama stopped short of backing a mandate for universal coverage as advocated by many Democrats, but his proposals still raise the prospect of increased government involvement in the nation's healthcare system.

Expanded coverage fits the main goals of pharmaceutical manufacturers. Third-party payment for healthcare services and products, which shields consumers from the real cost of medicines, has boosted drug use during recent decades. With the establishment of the Medicare Part D drug benefit four years ago, millions of seniors who previously paid for medicines out of pocket gained coverage for a significant portion of drug expenditures. The Part D program has been a boon to the pharmaceutical industry, but it also has put the spotlight on drug costs and value and has justified increased Congressional scrutiny of drug pricing, marketing, safety, and effectiveness.

Although many voters cited healthcare as an important election issue, the need for a new economic stimulus package will take priority over healthcare reform. Under pressure to address rising unemployment and low economic growth, Obama is expected to look for limited changes in the healthcare arena for the time being.

Children first

In Washington This Month

In addition to revoking federal curbs on funding for embryonic stem cell research, one early initiative for the new administration and the Democratic-controlled Congress will be to expand the State Children's Health Insurance Program (SCHIP). There is broad support for a larger program, but partisan wrangling over just how generous to make SCHIP blocked legislative action during the last two years. Democrats want federal support for state programs that provide healthcare for children in families earning as much as 300% of the federal poverty level (about $60,000 per family), but the Bush administration insisted on a lower ceiling. After President Bush vetoed SCHIP expansion bills in October 2007 and January 2008, Congressional leaders decided to hold off on further action until a new, more agreeable leader was in the White House.

Expanding SCHIP and Medicaid will help achieve the new president's goal of providing coverage to an additional 25 million individuals. Obama also proposes added incentives for purchasing insurance; individuals, the self-employed, and small companies would have access to private insurance options or a competing government-operated National Plan through a new National Insurance Exchange.

Medium and large employers, moreover, would face a mandate to support insurance coverage for workers or pay a fee, while a tax credit would help small employers offset insurance costs. Obama wants insurers to issue coverage to all applicants without regard to pre-existing conditions, a provision that industry says will drive up costs considerably, particularly for younger, healthier individuals. Whether the president-elect's plan can expand coverage economically without a universal coverage mandate remains to be seen.

Cutting costs

These plans would cost between $1.2 and $1.6 trillion over 10 years (i.e., 2010 to 2019), depending on various assumptions and models; expanded coverage would only increase drug use and spending on health services and medicines, particularly for the newly insured. Half of the projected outlays would be needed to fund Medicaid and SCHIP expansion, and the rest would support insurance subsidies and tax credits.

Lower tax deductions for insurance premiums would offset some of the outlays, but Obama plans several initiatives to reduce federal healthcare spending. Expanded health information technology, including broader electronic prescribing, is projected to reduce healthcare outlays by about $100 billion over 10 years, but is unlikely to save money in the near term. And expanding disease-management programs, coordinated-care models, and pay-for-performance initiatives could result in savings.

Obama also has jumped on the comparative-effectiveness bandwagon, predicting that an institute producing research on the relative effectiveness of alternate treatments would save money by reducing unnecessary treatment. Analysis by the Lewin Group puts the savings at a modest $40 billion, based on low expectations that providers and patients will adhere to new medical guidelines.